NRB Turns to Long-Term Deposits Amid Sluggish Credit Demand

Indicating that commercial banks and financial institutions are unlikely to extend large volumes of credit in the near term, Nepal Rastra Bank (NRB) has begun raising long-term deposits from the market.

Despite adequate liquidity, credit demand has remained weak over the past two years, leaving banks with excess of lendable funds. To manage this excess liquidity, NRB had been absorbing funds through deposit collection instruments of 4 to 56 days’ duration during the current fiscal year (FY 2025/26). However, on Wednesday (October 29), the central bank raised Rs 40 billion through a 175-day deposit collection instrument — its longest tenure so far this fiscal year.

According to an NRB director at the Monetary Management Department, the central bank opted for a longer-term measure as the liquidity surplus is not expected to ease immediately. “We do not foresee a rise in credit demand soon, so we have absorbed liquidity for a longer period,” the official said.

The central bank’s move comes as the private sector remains hesitant to borrow amid economic uncertainty. Following the Gen Z movement, which saw widespread vandalism and arson targeting private properties, private companies have been reluctant to take loans, citing insecurity and weak investor confidence.

The Federation of Nepalese Chambers of Commerce and Industry (FNCCI), in a statement issued on October 27, complained that police had refused to register complaints related to property destruction, looting, and arson during the protests. “Failure to register complaints and the apparent apathy toward punishing perpetrators could foster impunity and seriously undermine the investment climate. This would have long-term impacts on employment generation, revenue collection, investment promotion, and the overall economy,” the FNCCI warned.

Adding to the uncertainty, the government recently cut off electricity to around two dozen industries that failed to clear outstanding dues for dedicated and trunk line power consumption — a decision that industrialists say could further dampen investment sentiment.

Following the COVID-19 pandemic, banks had aggressively expanded lending, leading to liquidity shortages. But after NRB adopted a tighter monetary policy to curb credit expansion, loan growth slowed, resulting in an accumulation of liquidity in the banking system.

Limited impact of flexible monetary policy

Although NRB’s current monetary policy is relatively accommodative, credit growth remains subdued. The central bank has continued to absorb excess liquidity through its deposit collection auctions and standing deposit facility instruments.

According to NRB data, in the first two months of the current fiscal year (mid-July to mid- September), deposits in banks and financial institutions increased by Rs 32.86 billion (0.5 percent), while credit flow rose by Rs 49.24 billion (0.9 percent). In the same period last fiscal year, loans had grown by 1.4 percent.

An NRB director said that with excess liquidity persisting, substantial funds are accumulating at the central bank. “Our goal is to keep market interest rates within a certain range by operating monetary instruments,” the official explained. “Through the standing deposit facility, large sums are being held at NRB, as banks are unwilling to take the risk of expanding credit.”

According to NRB data, as of mid-October, BFIs had collected Rs 7514 billion in deposits and disbursed Rs 5673 billion in loans. The average CD ratio stood at 74.63 percent as of October 17, indicating that banks still have the capacity to lend over Rs 1100 billion while remaining within the regulatory ceiling of 90 percent.

Bankers, however, claim that investing in NRB’s instruments has become a compulsion. Devendra Raman Khanal, CEO of Rastriya Banijya Bank, said, “With weak credit demand, we are left with no choice but to park excess funds at NRB.” He noted that this trend has intensified since the recent Gen-Z movement began affecting market dynamics.

With excess liquidity piling up in banks, interest rates have dropped to record lows. In Bhadra (mid-August to mid-September), the average interest rate on commercial bank deposits fell to 3.96 percent, while the average lending rate declined to 7.66 percent — the lowest levels in the past decade, according to NRB data.